sales tax originated after the Great Depression for local governments to be able to meet their budget deficits yet they're stuck in this world where all of our sales tax regimes are very much built for the retail World it makes no sense welcome to the PE I'm your host Turner Novac founder of n capital today's episode is with Michelle Valentine co-founder and CEO of anrock a sales tax platform built for software companies our fun conversation gets into the history and evolution of sales tax plus tips and tricks on avoiding tax for scaling software companies something very simple to do as you're setting up your billing and payment systems collect the customer address Michelle takes us inside the seed round she raised in 48 hours your vision is important but how you package yourself with that vision is even more important where you're really the reason why investors are betting on you in the early days we explore how anrock got its first customers you know you've hit a pain point when you're in stealth and you're talking to real businesses about something pretty important like tax compliance and they're like we've looked at Solutions on the market they don't work I'm willing to take a bet on you anrock raised a $30 million Series be in the spring of 2024 and we talk early lessons on scaling a sales team if you're doing Enterprise sales I'd recommend tiring two AES at the same time we hir folks with two very different backgrounds and not knowing which one would work out Michelle spent a few years in VC before anrock and we wrap up talking building and investing in AI our human intuition makes it difficult to think in those exponentials we often don't see things like that in our lifetime you want to look at markets where there's a rising tide and the size of the p is growing and then you also want to look at the speed at which you can win the size of the p and if you squint and look at llms and what they're good at they're really good at two things before we jump in I publish new episodes every week if you enjoy this share with a friend and subscribe to my newsletter and the show notes to get new episodes in your inbox let's jump in Michelle welcome to the show excited to dive in so I'm excited too you have a really cool just framework around sort of the history of business models how they've changed over time over the past couple years would be really interested in having you just kind of kick us off how do you think about that yes we're recording this August 2024 it's post zero interest rate era and something that I'm hearing from many Founders and sales leaders is that the reasons to buy their software has changed and that has meant the way in which you build software position software also changes as a consequence and the trend is this a lot of people are buying to consolidate their software stack instead of buying a point solution for let's say cold calling a point solution for writing sales deal notes a point solution sales call like sales calling for example people are looking to buy a Consolidated version of all of those different tools and so so the interesting thing I think for like other Founders building software out there is like how do I position my product such that we come across as a full Suite solution interesting is that hard it depends on your industry I think what's surprising for anro industry we plug into billing and payment systems the thing that's different about certain industries like the financial stack is that there is still less consolidation than I would have expected even with this landscape change and my hypothesis is that Founders Finance leaders buy the billing and payment Financial system tools that help their sales team close so if your customer wants to buy using self- sell payments you'll probably invest in stripe if your customer wants to do a different type of invoicing like they don't want your standard you know QuickBooks or netw Suite invoicing they want to pay over bill.com or like their own specific workflow you will do anything to accommodate that sale yeah you're closing a sale in 2024 like revenue is important that's right and you know maybe a few other reasons is like one you want some redundancy in your payment systems right if one fails you want to make sure that you can quickly swap it out oh so people are doing multiple especially at the largest scale probably not if you're a early stage startup but there's that piece for redundancy and there's also pricing leverage um some of the larger prospects and customers we speak to they want to be able to negotiate the basis points pricing that the like payment providers might might want so for all of these reasons that trend of consolidation that was seeing in a lot of the software industry hasn't really touched the billing and payments landscape and so that's something that's like pretty interesting that that we're seeing at anrock do you think it's gonna happen or do you think it's G to remain pretty pretty fragmented just because of all these different you know necessities of of closing a deal and different types of customers and all that stuff I think because of the redundancy issue and wanting to make sure like payments go through my guess is that it's going to stay that way I think stripe is doing something pretty interesting where I think they are starting to allow you to switch out other payment providers under the HUD and so that could be an interesting play and I think that's a very very smart move I also do think even just simple e-commerce probably noticed as a consumer they now have not only PayPal and credit card they have Apple pay because there's data that shows if you can switch in the method that the consumer is used to paying with most they're most likely to convert and so there are now all these tools that also try to like estimate based on the consumer you're selling to what should be the primary payment method that you surface that will increase conversion so my sense is you know there might be fragmentation under the hood but to the consumer it might look a little bit more Consolidated because it's a smart system and it's telling you okay I think we know what you like to purchase with and so I think as you get a little bit more complex with your billing your invoicing You're Going Global like what what kind of happens at that phase usually that you see for context anrock we plug into billing and payment systems and we help monitor where a customer needs to collect tax which sounds brutal this is sales tax in the US this is global vat and for many software companies this is a new problem and we can get into later a little bit why and so my lens into in answering this question will be a little bit colored by what a lot of Founders and finance leaders will need to do eventually after they set up that billing and payment system so the thing that we notice people often missing is collecting a customer address if you're a soft company and you're selling a digital product you might think why would I ever need to know who where my customers is and it might add friction to the checkout process and so you might choose not to do that but the problem is is that when States inevitably come ask hey like you should be collecting sales tax or maybe you ignore it and you go through an m&a process or you prepare to go public your company will have to go through a big audit calculate a potential reserve for that tax amount and how do you do that if you don't know where your customers are and what tax rate the different transactions should have applied to that transaction and so something very simple to do as you're setting up your billing and payment systems collect the customer address it could be as simple as taking this the ZIP code on a credit card the full address is preferred it's more accurate but if you're worried about the like conversion process we've seen a lot of folks just like use the credit card data to at least know what state it is in or at least know what contut is in so that's like the first thing as you go Global there are other things that come into the mix like that ID validation so if you're selling to another business and your business so it's a B2B transaction there's a me mechanism called a reverse charge in many places in Europe and so that means tax dollars don't actually change head so there are things like that where you might want to think about as you set up your payment processes like how do you want to collect that or as you invoice a customer how do you want to give your customer a chance to say hello I'm an exempt customer or hello I have a bad ID so those are are things to think about as you set up your system as a digital product interesting so I I'm super curious then when you first started the company how did this kind of all get started and come about because it's a probably like the least sexy topic imaginable but maybe that's a good thing for starting a company one of the the things that I have been very lucky to do in my career is to spend a few few years in venture capital and so my job for many years was just to look at different business models and to talk to a lot of Founders and I think that allowed me to do a few things one is pattern matching like at the simplest level it's figuring out what makes a good business and then the second is how do I build conviction on whether I'm excited about that business and when I came across the sales tax problem it had all of the signals of a B2B business that I would have been excited to invest in and for me there were two aspects to the problem that really resonated with me personally on the one hand I really care about startups and the under Underdog and building for the internet economy people like doing Innovative things yet they're stuck in this world where all of our sales tax regimes are very much built for the retail world right it makes no sense sales tax is calculated based on where your customers are receiving the product but was stuck with that wait so why does that not make sense in the age of the internet well your customers are virtually everywhere from day one and your customers might move all the time right and so like why does the location matter when calculating the sales tax amount it's the best thing that we have you're right like I I don't have a alternative but it does seem like particularly based on this brick and mortar world and sales tax originated after the Great Depression in the 1930s and it was really a way for local governments to be able to meet their budget deficits and be able to say hey like you're making Revenue in my state like we should be able to take a cut of that and if you're a software company and you might never be in that state but you're selling to someone who just happens to have an address in that state but might move you know a month later and your your sales tax revenue dollars still consistently flow into that state government for the perpetuity of your like contract unless they update their address so then you need to update the invoice interesting huh that's the first thing that I resonated with me was like building for the underdog make it really simple like if you're a software founder or Finance leader like sales tax should be the last thing you have to think about that was something that made me excited and then the second piece was I do feel a lot of empathy for the state and local governments that are providing real services like public schools fire departments the thing that makes sales tax pretty complicated is that it's not just the state county City level tax that gets added that rolls up to this like big sales tax number but sometimes special pups districts like a school or a Fire Department District can say hey that 0.5% out of that 7% tax rate that goes to like my fire department and so that's something that I also empathize with so those are the two like personal aspects that resonated with me and then I think there was kind of a moment there was a Core case a couple years ago that sort of triggered it initially where you're like huh maybe this is a thing that I should focus on a little bit more yeah so the question that investors always ask when they're looking at investing in a business is why now like why should this business or this product exist now and what made me have such a strong reaction to this space as a a former investor is that two things changed in the landscape for software companies where they went from often not having to think about sales tax to having to think about sales tax so traditionally just to recap you as a business collect sales tax in estate if you have a physical presence so this can be an office a store a warehouse that means you have Nexus you have a close enough relationship with the state such that you as a business are obligated to collect sales tax from the customer and then if that state taxes those products the tax rate is based on where your customer consumes and purchases the product and so in a retail World those are often the same thing the store is where you have Nexus the customer comes in purchase this is the good that's the same place you have one consistent tax rate across most of your products and the main thing you have to think about is like are my different products taxable that's a typical traditional scenario wait so different products are taxed differently also yes wow it's usually binary like is it taxable is it not if you go into the land of groceries or alcoholic beverages for example yes a l there's a lot of like differences within that as well so at the basic level it's first question is do you have Nexus an obligation to collect tax and and then the second and third AO question is if the product is taxable where is the customer and calculate the tax rate based on by customers so the two things that changed is that one businesses went remote in the pandemic where all of a sudden all these Californian software companies had to think about sales tax in other states and California doesn't software so you often never had to think about it in your home state but 20 other states across the US do so that's like a big wave that changed the second thing that changed that really made me start to think about this problem was in 2018 there was a supreme court level case called South Dakota versus Wayfair so Wayfair is that like Furniture like e-commerce company that that a lot of people know and in this court case South Dakota W and the kind of ruling and implication of that was hey you might never have a physical presence in my state but you're making so much revenue in my state that that constitutes Nexus in an economic way so now software companies need to think about how much revenue they're making in a state and sometimes how many transactions they're making in a state so for example a state could have a $100,000 Revenue threshold and once you cross that you now need to collect sales tax in that state even if you don't have an office or a remote employee another typical transaction threshold we see is 100 transactions which is very low if you're a software business and you're invoicing monthly right that's like 12 a year yeah yeah and so this creates this ongoing monitoring problem that software companies now need to need to think about so these two things made me think oh wow like something has really changed and this why now reason for this Market is very compellent okay so this nightmare that we just talked through for the last 10 minutes you are fixing it all the stuff that you just talked about that's right and our goal is to make it really easy to integrate with built for the internet economy for software companies and so we understand recurring Revenue We sync in real time with your billing and payment systems to figure out where do you have to calculate tax so like allotting you in real time helping you register calculating tax on all of those transactions and then filing and remitting so we actually move money to the different states and so you never actually need to really think about sales tax as as a business oh interesting moving it to different states that's an important piece of it well you have to remit the sales tax that you collect from the customers and remit it to the states and the surprising thing that people don't realize is even if you let's say you decide hey you know I've got so many things going on and I'm just not going to figure this out yet you as a business are still on the hook um to eventually remit that tax so if it comes up in an audit or you know an m&a trans action you'll be holding some kind of escrow of like what that tax amount should have been and customers are willing to pay the sales tax amount if you bought that cup of coffee this morning like you didn't decide oh instead of you know paying that $4 cup of coffee and now there's a sales tax rate on it I'm not I'm not going to pay for that cup of coffee that just doesn't happen you're used to paying the tax as a consumer while you're based interesting so just because remittance people might not know what that means that is basically you like kind of hold it an xrow or save it to eventually pay the government when it's due right is that essentially what remittance is yes and often it's monthly it can be quarterly if you have a very low sales amount in the state it can even be annually U but for most sales tax regimes it's it's monthly or quarterly how were people doing this before or are they kind of doing this like what do you how do you see people figuring this out usually so before enrock there were two probably different ways of doing it one is obviously manual you can work with a Tax Advisor if you're only doing Enterprise invoices and you only have a few a year it might be very much manageable but if you start getting into the dozens of invoices that actually doesn't get very cost- effective um but you still might want to partner with a tax adviser for like taxability advice tax strategy and at anrock we work very closely with many tax professionals that can advise the software companies on kind of glowing Going Global strategy for example the second method is to use a legacy system that has been built for retail so our largest competitors that 20 and 30 years old and they tend to be typically like very hard to integrate if you're a software company and you have recurring subscriptions you also might want to see your Global transactions from day one and historically the retail systems don't have to think about global Commerce because there's customs duties there's a lot of other obstacles that it might take to go Global as a like brick-and Mor or physical business and so at anrock we've built Global from day one so you can do US Canada Australia all the countries that you need to think about for software you can actually see that in one place one thing you mentioned was interesting was you can choose to not pay I guess sort of or not worry about it but then later on you do eventually have to pay how does that usually come to fruition like let's say I get acquired I've never paid s sales tax before done a whatever you know hundred million in Revenue cumulatively what is that going to look like when I try to figure it out at the end of the tunnel so for every business it's a little bit different you might have different risk appetites you might have different exposure Footprints so these are really questions you want to speak with a Tax Advisor with the reality is if you ignore sales tax and let's say hey I'm willing to continue to ACR the liability you should be recording that if in your book so even if you're like not collecting that sales tax amount you as a business are liable to remitting that tax eventually to the different governments which is why collecting the address is really important because you need to calculate that at some point and the more accurate data you have the more defensible your Cas is to say Hey you know state of New York this amount of Revenue is not yours I've collected the addresses and it's only you know 10% of my revenue is in New York not like 80% or or whatever case that they might be trying to make so the few eventualities is one you could get audited by multiple different states in a year just given like your your company footprint right it's a state-by-state system let's say you're lucky and and you don't go through an audit as a business and you might go through an m&a or going public process part of that due diligence is sales tax and so that can probably be a very uous process where you have to figure out okay like we need to create some kind of escrow and that's taken out of the acquisition amount or like that's a risk that we have to disclose as part of going public that we still need to like file something called a vda a voluntary disclosure agreement or do all these different things as part of going public because with neglected sales tax that's becoming less and less common just given how prevalent sales taxes for businesses maybe a decade ago you know only a few businesses had to think about sales tax because they had a physical office in a state that taxed s software so they had to think about it whereas now all these businesses have remote employees so you have to think about it a lot earlier so we're seeing it becoming less and less common that that you actually ignore the tax interesting what other kind of changes are you following just in the broader tax landscape right now this development is happening all the time Vermont in the last few months just changed how it's thinking about taxing software companies another recent this one is like less of a change but more of an annual sales tax related item people need to think about is Chicago is a city that taxes software but the state does not this is like quite unusual typically cities follow the taxability of the state and so that deadline just passed in like a few weeks ago now and so those are the types of things that you know if you're interested anrock we we have a midye tax update and you can get all of your like tax digest that you need as a as a Founder in one place you know this isn't something you should should be thinking about on a monthly basis but those are some of the developments that are happening all the time that impact soft interesting okay well that's a good I guess it's a good plug do you guys have like a newsletter or something that you put out every whatever period to stay on top of it yes we have a newsletter that you can sign up at anrock tocom we also have a substack called journal entries so if you're more interested in finance I think this is more cated to like CFOs Finance leaders um Founders if you're still owning the finance function this could be interesting to you where we interview a lot of CFOs and finance leaders to get a sense of like what they would do um so that's journal entries substack and rock okay cool we'll throw we'll throw a link to both of those in the show notes if people are are just dying to get more tax more tax stuff so one topic I kind of wanted to get into fundraising you raise your seed round in 48 hours in 2020 can you I don't actually know the full story behind that can you just tell me what it did go very very quickly I think there were a few reasons for this one is just the context of the time where all of the fundraising pitches were over Zoom it was the depths of Co and so I think the speed in which investors could move um was very very fast I think the second thing that really helped was that I used to be in VC and so I had many pre-existing relationships with investors who knew how I worked how I would think and knew how careful I was with picking markets and and picking teams I think for a general kind of reflection that I think any founder can take away from this is your vision is important but how you package yourself with that vision is even more important for the seed stage where you're really um the reason why investors are like betting on you in the early days and so taking the time to build that relationship before a fund raise can actually make your life so much easier I do think it is tricky when you're a seed Stage Company you might want to stay in stealth and you don't want to spend too much time with investors and um be distracted the best advice I have about this is get warm introductions or try to be involved with let's say like the Scout fund for example before you start the company or before you're being explicit about starting a company to start building those touch points show up at their like community events if you're an open source go to that open source events and then when you fundraise that's when you can share a little bit more about your vision just given at the early stage your idea is so important it might change you might not want to pitch the full idea um before you start building the relationship so that would be like my best advice is be really intentional about the initial meetings and try to make it more about you and how you think and testing out that chemistry because that chemistry is important you know going both ways as well before you get too deep on the specific area the specific problem um which could change depending on you know your your business yeah that's one thing I found is that of all the I don't know successful pre launch Investments that I've made I think zero like exactly zero it's the the product that ended up being what the business is it's never been the same thing like it's always some of them have been like literally go going consumer to B2B and some of them are like vague General problem area but like completely different product like the thing that was in the pitch deck just doesn't even exist because like they no one wanted it so I can definitely see that the the other interesting thing you hit on was the Scout program for somebody listening doesn't know what that even means can you just real quick explain what that is and how how to do that like how do I become a scout many investors have a program in which they want to keep a pulse on the Undiscovered Universe of startups and the best way to do it is often people at other startups are already like walking at companies that have an amazing talented team that might go and spin out a company and so they really want an ear to to the ground and also teach you how to invest a little bit as well along the way so the best way to to get involved um besides like a warm intro is actually to do the job before you have the job really come up with three to five different ideas that hey like have you heard so and so is starting a company or these are the three companies or people or even themes on my radar that I think is like pretty exciting happy to facilitate an intro or chat with you more about it you know I'm interested in your scout program like please consider me for like your next batch um a lot of investors do this on like a fun by Fun basis so that they might be some time where they're they're inviting more Scouts um each investor does runs it a little bit differently would you recommend if that's something I'm interested in just ask ask a friend who's a VC or ask other Founders if they know you you can ask a friend but um making sure you roll that in with like an Insight you saying hey like this is the value I can add this is like what I can bring I think is quite important because a lot of people want a finite number of spots and it it sounds like a a big point of it is getting either insights on how markets or the world are changing or specifically deal flow so you'd probably want to say if you're trying to be a scout at some fwn you like here's one or two or five Founders that you should meet exactly and then how how long had you been working on it like had you started at all when you were at air table like is that when you first sort of came across the problem or sort of an evolution over time of I think you were at index before air table we had been working on the product for a few months before we raised our seed round for us I think the big thing for a lot of like the early stage rounds are more of a Founder team bet than it is like a product or a specific Marketplace bet the thing that I'd encourage people to spend a lot of time on is actually building relationships with investors because as much as you think you're selling your vision you're selling like your point of view on that Vision rather than the vision itself so one thing that really helped us and the speed and velocity about seed round was the prior relationships that my co-founder and I had to investors that I I really respect and was excited to work with how would you recommend somebody do that like did you meet them when you were still at irit table index how long was like the the getting to know each other process my story is a little bit unique in that I had the luxury of working at one of these investing firms and so my job was to look at businesses with other people talk about different business businesses so people understand how you think one of the I think most underrated ways to actually get to know in invested communities is join the Scout programs that could be a really great way to start getting to know multiple investors in those FMS before you even decide to start a company and so an easy way to do this is to you know write up a you know quick email to say hey these other five like pre-seed or seed companies I know that are amazing and you should take a look at and hey by the way I'd love to learn to invest more if you have an opening in your scout program I'd love to like meet with the tea and so that's a way that you could start to build a relationship with with the company before even starting your own company if you're already at the point where hey like I I've started a company and and I want to get to know investors I would say kind of time box when you want to meet investors long before you want to raise and say hey like I'm happy to take a Cofe you know like this month for you know one or two weeks so that you don't distract yourself from building but make it very clear hey we're not fundraising till next year and just being very very diligent and disciplined with how you how you spend your time and know that even if it's a casual coffee you'll be assessed on how you think kind of your excitement F the space yeah what uh I I know you were an investor before like what did you learn about fundraising from sitting on the other side of the table for a few years I would say number one is come in prepared I think to the point about you know that there's no such thing as a casual coffee I do think it's true I do think you can take a a coffee and be very clear you're not ready to share metrics if you truly aren't fundraising but I do think making sure that you're raising at the right time for your business is very important there are all these other cons like other factors that an investor might be feeling at their Fund in their personal life to make them interested in your business right now just because you're getting emails doesn't mean they're excited to invest right they they're excited to have the right to look at the business to invest and so just making sure as a Founder you're not falling in love with the attention and you're rather making sure that you know the right time for your business to raise and really sticking to that I think that's like the number one role of of fundraising fold the business so yeah it's a tricky thing to balance of getting to know people but not actually be fundraising like it's kind of it's not intuitive I guess and honestly if the chemistry is good those conversations are easy right you learn so much from the investor you might even share a lot of ways of about thinking about your broader Market that they might be interested in so I would say really try to lean into like that way of framing I think there's a chance where you might end up feeling like you're getting interviewed and you're only talking about your business make sure that you you've done your research going into that meeting too and ask the investor about their companies and what they're seeing and and really learn from them in that meeting as well yeah what kind of things do you think were most helpful questions to ask to get to know people like what did you value when you were thinking about okay I'm trying to have a couple people I'm selling them part of my business what did you want to know about them before you did it there's the general piece about the investor themselves and what have they been interested in why did they invest in so and so company that got you know got invested recently and then there's things that are more relevant to your specific business where don't be shy to ask like what is the biggest concern that you have about my business or what do you think the biggest obstacle will be for me in the next year like those are really interesting questions for you to think about and you don't need to address those in that meeting you you can say like oh that's really interesting let me like think about it or like I have an intuition and this is like why I think it's less you know relevant or important but let let me go like explore that more because you know I think you could be right I need to really sort that out before my fund raise next year so then coming from from the investor side now you started a company do you see yourself as an investor still enrock is my baby it's like the number one thing I'm I'm thinking about Angel Investing is very helpful to think about the broader landscape to swap notes with other Founders I think for me it's a combination of sharing my learnings of being a few steps ahead and codifying like oh I went through this let me actually take the time to reflect and express this to another founder so actually learning from that experience the other thing that is useful to me is that actually we had a really amazing moment the other week where a company I Angel invested in a few years ago now came to us and said hey like I was talking to the finance team at this like very incredible like enterprise software company and they're going through tax issues and they asked me for like advice and I thought of you and like actually can we hop on a call because I I want to make sure that before I do this referral like you can actually help them and that was a really amazing moment where it helps us be top of Mind mind for them so just as much as you know I hope to help these portfolio companies there is something pretty powerful about that network if you start Angel Investing early and ultimately it is a very mutual relationship that can blossom into like a long-term friendship yeah no that's true I generally try to as much as I can be be as good good of friends as you can with all the the founders that you're investing in so when you when you first started anrock the very first product what did what did you do like what did it look like the very very first thing that you went to Market with for us we knew exactly what we were building I think there's many ways to build a company you can look for product Market fit for a long time you can pivot for a long time and still land on something pretty amazing I think for us we spent you know in some ways you could even say like my VC days of looking at businesses you know I wasn't interested in starting a business then but if I had come across this problem when I was at index I probably would have like Po and be like oh maybe I should go do this right and so for me it was a very intentional move and so the first iteration of the product we knew clearly what the pain points were and how to build a product that addressed the needs of our ICP one unexpected thing I think when we were building is that we thought some people might want to file and remit on their own so going back to your question about remittance we thought some software companies might want to control the filing process they might want to control where they remit money to and so we had two modes in the initial product we had easy file which we help and file and remit on our customers behalf and we had hard file which wasn't officially branded as hard file but no one actually wanted the manual H file surprise surprise wait no one used it no one wanted to file themselves even though we built into yeah no no one wanted to file themselves I think you know once in a while it might come up where someone might say oh we already already have a process we're interested and at this point we're like hey like literally 99.9% of all of our our customers are like using us to to file at this point like we we're not going to do something like a special snowflake just for you if you want to use us we're going to you know take it off your plate end to end and usually they have a really great experience and so everyone went to the easy file how robust of a product was that like did you just kind of have an air table that you fancied up or did you like like what was the extent of the first product and and then working with customers designing the kind of the first couple iterations how did that go the thing that moving everyone to the easy file process unlocked for us is actually a different way of billing our customer we thought we might need to accept credit card payments for example for folks that wanted hard file and with credit card payments it's actually pretty finicky you need to make sure the credit card is updated um there are all these additional fees that credit card charge as well on top of that and for us it adds like friction to the process and by moving everyone to the easy file automated remittance process we could take out our fee as part of the remittance process so we would debit an a bank account move the money to the different governments and in that process take out the anrock fee and that's a much stickier and a much smoother experience for both both parties and so that's something that was unexpected that allowed us to really make a win-win experience for both the customer and us and actually get the job done interesting okay so just to make sure I get that right with the hard file which no one ended up doing you would have had to kind of send separate invoices when they were doing a lot of stuff manually by themselves with the easy file it was as you were kind of escrowing and remitting the taxes as things were happening able to kind of take a cut that's probably good for cash flow for you as a business too you're getting paid pretty quickly well we we debit at the time of like the return so could we earn interest on the one or two days that we hold to the the funds sure but that that's not our primary business model I I know some like Neo Bank types do that and it it really is like more interesting at scale and also as interest rates rise maybe it's more attractive for us that that isn't the the primary driver it really is that great customer experience okay and then so do you remember how you got the first couple customers how' you get them to sign up for this new easy file product you know you've hit a paino when you're in stealth it's not on your LinkedIn and you're talking to real businesses about something pretty important like tax compliance and they're like oh yeah we've looked at Solutions on the market they don't work for like the internet businesses they don't work for my subscription businesses I'm willing to take a bet on you like that's when you know you've like hit on something pretty pretty interesting so before we came out of stealth I think we had something like like almost like 10 or so development Partners so to me that was important to have that initial announcement actually have real customer names on there I think that social proof does matter and very grateful for our initial early customers I'll give credits to to my co-founder and CTO he actually helped with a very very fast customer with someone he knew from his dropb States so using that network using the network of folks you've worked with is is really important to say hey like what will you take a bet on on a startup that you know has no no public presence yet yeah so it's mostly is it was it everyone just kind of people that you had met over the past couple years and started working with solving the problem no out of those like 10 or so folks like only a handful and the thing that made me really convinced about the problem was when we were exploring the space the amount of people that responded to our called LinkedIn messages and email messages on like oh I'm willing to talk to you helped me gain confidence oh my goodness this is a really shed pain Point yeah especially taxes and compliance you can't really mess that up like they must have really really like needed the help if they were willing to to trust you with that so then how did you initially then navigate acquiring more customers starting to move up the stack in Enterprise like what was kind of the next I don't know year or so after you raised the seed around and really started going so the early sales were really driven by myself and our coo and really I think that was something like you know I give him credit for the first 20 or so customers that that we had and when you get to the point where you realize hey this could be repeatable let's see if other people can sell the product specifically a full-time salesperson if you're doing Enterprise sales I'd recommend hiring two AES at the same time we hir folks with two very different backgrounds and not knowing which one would work out what were the two backgrounds so one came from a large like Erp business where he sold to the finance Persona before and then the other persona was someone who hadn't sold to our ICP before but had been at a startup had been the first sales reps and we had a hypothesis that both of these profiles could work really well but we didn't know which and you know you have product Market fit when both walk out and they're both doing a great job and so that's one way that you can both drisk that high to figure out okay is this a product Market fit problem is this like the right sales Persona fit problem and ideally like you do two at once so you don't lose too much time and they can learn from each other as well and so in two very different backgrounds very different backgrounds okay and then did you when you scaled up did you continue the two separate kind of personas in like five of each 10 of each or were there new personas that you kind of added or for us we started going into like different segments of the business so today we have like a commercial S&B segment we have a mid-market segment which was the segment that we really started at and then we have the Enterprise segment as well so these are more six figure plus deals with the commercial segment to me what's pretty amazing about it is that it just shows how mainstream sales taxes now where I didn't think we'd be selling to like seed and series a businesses but the number of businesses that say hey we're launching our product for the first time I know we have customers in New York or maybe I'm headquartered in New York or Texas and I know I need to think about that from day one with closing business at you know the very early stage all the way to like hey I'm preparing to go public and my existing system isn't working for me or hey I'm only doing the us but I know I need to go Global and my existing system has all these add-ons to go Global androck can R so today the way that our sales has evolved is really thinking about our business different segments for us the ICP doesn't evolve too much we do sometimes sell to the finance then the first Finance higher then ultimately the tax te but what they care about is generally the same just more and more sophisticated other businesses that I've seen as you grow into the Enterprise sometimes the selling motion is totally different all the Persona wants a totally different product and that's where you as a Founder need to really think ahead and before you go into that segment like do I have a product that will win in the segment and you know one last thing on this is the concept of hey I found product Market fit is actually a simplification there as you grow you're constantly refining product Market fit for every segment that you're selling into and for some businesses it's more organic and for other businesses you really need to like totally change the product and really reink you'll go to market strategy if you go from selling to like a sales or marketing team to like the procurement they're going to care about very very different things interesting so when when you moved up into Enterprise sales the six figure deals maybe Lessons Learned slash examples how did you navigate that for the first time so one thing that I'm very grateful for is early on we decided hey we're going to not only get sock 2 compliant we're going to get sock one compliant this is more important for businesses in the financial sector where this is more about controls on on your your business and so that's something that we did very early on and so as we've sold into the Enterprise customers come to us as like oh like do you have like socks sorted out and we able to say yes and we have multiple years of operating history with that as well and so that's like one thing that you can prepare today before you sell into the Enterprise and yes it's it takes time and it takes effort but it really does pay off so just so I get it straight sock one is that like sarb Oxley like audit Financial control it it's it's Financial controls it's like where is the information coming from going to like can people read write edit you know the the transactions that's probably not like a no-go and then sock two there's type one and type two ideally when you're selling into the Enterprise you've actually gone through the time period in which you have a type two certification interesting so it seems like and you were already sort of were you kind of doing Enterprise deals from the beginning or did you do a trial period like how did you convince people to start like I you didn't have a public facing brand really at the time like in the early days we only started moving into the Enterprise after we launched our Global product and that was about two and a half years ago and the main reason is Enterprise businesses you know you might start off focusing on Us sales where maybe 60 70% of your your sales are in the US but eventually as you grow that 30 or 40% becomes meaningful and you will want to care about tax globally and so it was only after we we had that had we like really started to pursue Enterprise bus businesses and they also came to us because they did see hey you have the best in-class product for our Global needs reflecting back kind of on I don't know the the journey so far you've you've raised the seed round series a series B state of the business I don't know how big how big it is specifically today anything you want to share what have you just kind of learned in terms of fundraising specifically over the past couple years the early seed round if you do it right it can really set you up for success and momentum in series a and series B fundraises specifically the few things that I would think about is one making sure that you're working with folks that can help you um attract the best investors for your a and so the quality of your investors at the SE round does matter both in terms of their reputation as a fund but also the individuals like if you bring in angels if you bring in Tona right he has a network can he introduce you to the relevant investors for your industry segment okay that makes sense and then I I think shifting gears a little bit you if you go on your LinkedIn you've kind of written a little bit publicly about a of stuff one of the topics I thought was really interesting was you have this kind of three-part series on thinking about how large language models are going to impact I mean not just investing building different companies different parts of the economy why is it so hard to predict what's gonna happen so maybe starting with my journey with AI I moved into venture capital I remember I started in 2017 so I I got the offer in 2016 and one of the things that I had to like get up to speed on very quickly was AI that was like one of my focuses and I remember before starting I spent all this time reading like Nick bostrom's super intelligence book which I highly recommend to anyone interested in the space it's you know been almost a decade since but I think it's aged pretty well and I I did a few other courses like an's like machine learning course back in the day as a way to prep and so I've been looking at the space for a long time and I think progress has gone faster than people expected I think a big shift from then to now is that scaling laws are a real thing and the more computes you put into to model the more competent and capable those models are and that scaling law or relationship was pretty new that was not something most people knew or most researchers would have believed in 2016 I I think a few people did but that was a a really a new phenomenon wait so why would you why would you not believe it well back then I think people were focused much more on algorithmic improvements I think people were like focused on like more traditional machine learning techniques not hey let's you know throw a bunch of money and compute and train a model for a long time I think people took a much more sophisticated approach and a lot of I think researchers thought it was a dumb approach right like it can't possibly be based on things that we already know there must be like a new way of building these things and also there's also transforma architecture that hadn't been really codified yet so there were a few things that needed to happen before you could train big language models but the main developments was the paper attention is all you need and then in 2020 the scaling loss paper by Sam mandish really cified that relationship between compute and scaling so maybe that takes you know as to to your question of like what do what what makes it hard for people to predict progress and I would say actually if you look at the scaling laws Pap paper people have really predicted progress in the last few years very very well and it really is our human intuition that makes it difficult to think in those exponentials to really believe what does it look like when a model goes from being able to some one or two digit numbers which really was like gpt2 and3 to really complicated Olympiad math which is more like gp4 or CL 3 and so that type of exponential thinking is very unusual we often don't see things like that in our lifetime and just pausing to think oh like four years ago if you ask me like could I work with Claude in this way on my day-to-day work and realize no I couldn't even have imagined that that should update you on how much confidence you should have in your own intuition okay so you said you work with Claud every day what do you use it for so many things everything from helping think through how to look at marketing data I'm not a marketer by training we have paid channels we have organic channels like how do I interpret this data I use claw to Think Through just writing a a PRD um I write fewer prds but I often like think about okay like I'm reviewing something for my team like what could have missed I like work with Claud on that so so many things interesting okay so you you use it as if you're typing something you run it through Claud almost very often even you know let's say if I'm dealing with like a high stakes negotiation or like heated discussion I think it's useful to get claude's perspective and just say hey can you like proof read this like am I escalating a situation that unnecessarily and and helping be your sounding board like Claude is very good at that uh a feature that a lot of the team has started using is something called the knowledge base or knowledge projects within Claude I I don't know if it's available on individual plans but it's available on we use the Enterprise plan and we put let's say a very common use case is generating content so we put a lot of existing content blog posts uh we have a voice and tone guide that someone on the team wrote and we put it into an knowledge project and then we're using that to train Claude in a way you don't need to fine-tune right it's part of this much much larger prompt now that you have a knowledge project and then you UT hey like I want to write an outline on this topic like based on you know prior outlines the tax knowledge that you know like how should we think about writing this outline so the knowledge project is almost like a stored style guide in a way for the use of an llm or like the output yes that that's one way to think about it you could also instruct the model to only use information from the knowledge project for example if you don't want it to use you know Knowledge from elsewhere and you know I think as mod models get smarter they're less likely to hallucinate but if you want to you know make sure that you're only using information from like a certain selection of sources a knowledge project is good for that as well so you could say you can take the entire anrock like any piece of company information you've ever produced through throw it in there and then that way it will'll never hallucinate and make anything up that's not actually true or that anrock ever put out you could we don't do that oh okay interesting I'll have to try it out because yeah we were talking before we started recording that I've I've been struggling on the marketing content of like specially related to the podcast like it's never quite good enough maybe I'll have to check out the knowledge project from from Claude so how do you personally predict how Market sizes are going to change with AI I think this was maybe part two that you wrote and we'll we'll throw a links to all these in the show notes for people but how do you personally kind of predict how to size a new market in the age of AI I probably even think about you know removing that as a factor from the question and think about how do you even predict sizes of markets in general I think there's a lot of evidence that points to us getting it wrong all the time the story I love is figma with Dylan field and people would ask him you know how many designers exist out there like who can you sell to and at the time not many people had designers on the like LinkedIn profile and use that as a title but a lot of people were doing that work and the pace in which you are hiring designers as a ratio to engineering was increasing really quickly and so there were a few like indications like that that gave Dylan the foresight and the confidence but could you point to like a very clear Tam back then you couldn't and now looking back people really underestimated you know figma's potential Market size I think canva is also a very interesting one where like canva is a giant giant market people don't realize like how truly big the I would say it's almost software eating the world like every business needs to to really like build digital assets and have a digital presence and and really yeah use tools like figma and canva so I'd First Express that we get it get it wrong all the time whether or not we're in an AI W the stat that I find pretty helpful is and I think maybe relevant to a lot of the listeners here where they're building in software as well is how fast the software economy has historically grown so if you take any software ETF it compound it's like about 19% ker and which over the last decade that comes to like a 6X growth in a decade which is pretty wild so that's kind of your rough Baseline assumption is this will probably 6X over the next if it's software like your 10 yeah and it's hard to imagine for me that the piece of change is going to be any slower if anything is going to be a lot faster than the last decade when we all have virtual AI assistance helping us code augmenting on knowledge form yeah it sounds like you're also saying that speed of adoption or speed of change is almost just as important as the actual size of the market too yes you want to look at markets where there's like a rising tide and it's it's growing and the size of the pie is is growing and then you also want to look at the speed at which you can win the size of the pie and so markets where there's a lot of Greenfield opportunity are particularly interesting because you don't need to rip and replace Legacy Solutions in order to win the market so these are Frameworks that I think a lot of investors typically use when they look at a market and that's why I think a lot of investors don't love the CRM Market even though though the CRM Market is really really big because the speed to win the market is already a really big established incumbent with a big ecosystem it's like much harder to to have that speed to win the market even though the the pie is growing yeah speaking that I think one of my favorite kind of ongoing jokes or memes on the Internet is what does Salesforce even do I think it's like a I don't know what the market cap is today a couple hundred billion and I feel like every day I see like a tweet or something where someone's like what does Salesforce even do it's like DocuSign I don't know if if anyone listening seen those jokes where it's DocuSign has I don't know 6,000 employees and it's it's just like signing a PDF it's like another one of those things so then like if you an investor right now you do some Angel Investing or if you were in an investor seat how would you think about investing in AI like what would you be paying the most attention to what would you actually want to be investing in if I think about what llms are good at and I'm looking at investing in like llm power companies right you could say oh I'm also interested in Foundation models you know that that's one layer but let's keep this discussion on like what is cool to build so this just like broad software that is going to incorporate AI broad software and if you squint and look at llms and what they're good at they're really good at two things one is generating content and one is synthesizing a lot of data and so the best businesses that can take advantage of AI have a lot of proprietary data to synthesize that you can then generate really valuable content and that flywheel if you can find businesses that have that proprietary data and then can generate disproportionately useful content those are the most I think interesting businesses that will have a like a I would say like some kind of moat in the AI Walt like the extent of that moat is it impenetrable probably not but I think those businesses are are most most interesting what would be an example of that I think I maybe know you can maybe think of something but I'm curious like what would that look like in practicality like any examples so I I do think tax is pretty interesting where we have like interesting Revenue data that that a company has across their like self- serve payments the invoicing we all have that in anrock and we can Surface pretty interesting insights on on on that I think an example outside of anrock is I think legal AI is like pretty interesting and and why people AR interested in that where you have proprietary data and you can synthesize really useful content and insights from that those are like the the two that I I I would pose there's so many more it's a a really exciting time to build so the insights is that within the product or more from a marketing perspectives you constantly have that engine going um more value to the user right you're taking their so in the legal case let's say if you're Ironclad and you have all of the like legal documents of all of the contracts you've ever signed and someone sends you a new contract and you're like well what stuff should I care about you can synthesize the data from your existing contracts and be able to say hey like based on historical comments and activity in the iron CL platform this is like me totally guessing here but like of what they could be doing but this is like the Insight of what could be interesting and you know what the initial redlines might look like for this contract hey like in-house lawyer General Council like what do you think I can I can see that yeah and and then especially for anrock it's like I'm assuming you probably can create a bunch of um reports that are related on spend shifting or you know interesting Trends across their own business also based on the sales tax yeah already today I think a lot of customers say hey like anrock your you know your Finance data is valuable you know could I use your data elsewhere and so that so that's something that we're we're hearing from customers already today interesting so a little bit different question but let's say you you talked about how understanding how AI was evolving how was changing how have you personally found you kind of update your thinking around like something you used to think was true and as you know the market changes the landscape changes what's been your process of revisiting things and it's like ah maybe this is actually different than I thought like how how do you do it personally it's a building almost like a Quantified intuition of how I feel about something and it's not transferable across people if I say hey Tona I'm 60% confident that we should do this podcast and 60% like what what does that mean that's pretty low that's a D minus you know like no is that high or low but it's probably pretty high for me right to say oh like let's let's chat for like two hours or something like that and so the most important thing is you know what that means right you know when you say oh I'm like 10% sure about this thing like what does that mean to you does that mean like it's worth your time to explore like should you listen to that signal should you not listen to that signal and so that's something that I've done over time I think looking at a lot of businesses in VC like helped me hone this of like okay how much confidence do you have that this is like a good Market good team good business or like actually like there's something that I can't like quite put my finger to but I'm like you know 80% confident this isn't a fit let me like listen to that and figure out why I think that over time is really helpful what we do internally at anrock to try to communicate that to other people is to have a much more generalized way to communicate this in a document for example so we can say epistemic confidence is low I'm like proposing a solution based on an Insight I don't know if this is the right direction but I think it's worth socializing it to the group to see what other people think and by saying it's slow it helps preview to other people how much time they should spend on it or how seriously they should take the proposal whereas if someone comes in to say like hey epidemic confidence is high I'll spend much more time looking into that and if I like disagree with something I should okay actually let's talk live right I'm not going to dismiss this because you think it's high and I'm like skeptical like let's actually talk it through and so I think that confidence level is very helpful in just moving faster as a team to know okay like this is like a small experiment and all of us feel like it's low but it could be worth doing because it's a cheap experiment or hey like it's low and so we shouldn't spend time on it right like just seeing that on a doc helps you know how much time you should invest in reading it or how seriously you should take it yes you come to me with a pretty crazy idea and you're like I don't know like 5% on this you're like yep I don't think it's let's just move past it or if you're 90% I might be like all right let's let's let's talk about it a little bit further well maybe you're 90% And you really trust the personent in the domain and you might say okay I've skimmed it I don't need to be involved right that that could be another outcome as well whereas if if they say hey I'm an expert but I'm only medium confident I might need some help right that that's like another good indication that can come from that as well okay this is a little bit more of a niche question but it's on the topic of of writing and and you know putting things down I've heard you mentioned before you're more of like a written communicator but now you're on a podcast what advice would you give to a Founder who's you know they're starting to think maybe I should do some podcasts like how how did you get yourself in that mindset and get ready to to do it if you're more of a writer for a lot of like founder jobs to be done you're getting out of your comfort zone all the time and you're really multitasking you're doing so many different types of things day-to-day it's a lot of context switching and having the attitude that hey it's a fun challenge let me give it a go and let me use this as a learning opportunity helps me I think it depends on you know what really motivates you as an individual for me it's curiosity learning self-actualization is really fun and so to me when you when you ask to like chat I'm like oh this could be a fun learning experience yeah that's fair so question maybe more internally about anrock do you have a favorite interview question maybe something other people could learn from or just favorite go-to interview question when you're interviewing people a few different things I think if I'm coming in late in an interview process and I want to get the lay of the land but not go through that their entire resume and kind of Dive Right In I like to open with you know what are the three things you're responsible today in your role and so I can quickly like figure out okay can they communicate concisely how relevant is their existing experience should I focus the interview on their existing experience or their ability to adapt their experience if it's quite different the thing that I like to ask to understand an individual a little bit more is like what are you uniquely good at compared to your peers in that role so if you're a engineering manager or a sales manager it gives you an indication of a few different things one is how they like to be perceived um amongst other people and two it gives you some indication of them in a dynamic with other people and how they could operate on a te it's interesting it's it's actually so the episodes going to come out right before this one he he sits down for two hours and goes line by line through their resume each every single role they've done asking every single thing they they do I forget the name of it it's a top grading interview and I highly recommend it yep okay that's what it's called top grading and he lives by he's like that's the process is you sit down for two hours you top grade and then they make a decision we do that for every role and typically it's a hiring manager that does that so the hiring manager knows the breadth of their experience and I think what I like about it is that it gives you a jumping off point for like strategic questions so they might say oh my proudest accomplishment is X and then you can follow up with oh interesting how did you notice that being like the problem to solve or why was this the like highest priority issue like what were the tradeoffs and then you can go into more the Strategic thinking but you try to keep it to the same like broad set of I think five questions and then you want to block out a full hour so you have time to like go through slightly slight tangents especially if they're a more senior candidate and you want to understand how they think about strategy interesting okay so last question I'm curious if there's a certain business founder another company you know it can be like you can be maybe just like a CEO of a business anyone throughout history or even recent that you've just always really looked up to that you know you feel like you've learned a lot from Scott Cook into it uh he's one of the founders there well he is the founder at at into it and what's been pretty amazing I think is one just generally the the business has gone multiproduct and you know it's a multi hundred billion dollar market cap business and he's still involved so he's scaled from a founder to a public company CEO to still going into work every day and really from the outside it seems like he's like really energized and and loving it and is still involved and that type of scale or like ability to scale yourself is I think pretty unique and he does it in a way where you know he's often the most accomplished person in any room but he will make time for you and he'll like get to know you and it's pretty amazing to to watch interesting when was into it founded was it the 80s something like that I I actually don't know off the top of my head interesting I mean it's definitely an older older company pushing 30 40 years old older than me I would assume and QuickBooks is still very very prevalent today yeah that's true and then if you if you go to their the thing that surprised me the most too is you go to their investor relations page and look at some of their Decks that they have they've kind of laid out the vision for the company they have interesting kind of tentacles in distribution across hundreds of millions of small business businesses I don't know what the customer number is but it's kind of insane you think of okay we started with accounting software but that's led us into payments like credit products to the customers you can lend money to them invoice factoring HR and payroll they could probably they probably already doing this so it's interesting like how big could that business be ultimately it's probably one of the most scaled SMB products globally maybe maybe like Google ads is is a bigger one or I don't know but yeah it's pretty incred company awesome well this has been a lot of fun thanks for coming on thanks for having me and thank you for listening make sure to check out the show notes if you want to go deeper on some of the topics mentioned throughout the conversation if you like this episode it would mean the world if you liked subscribed commented followed and share it with a friend who can learn from it and if you don't want to miss future episodes subscribe to my newsletter the split in the show notes and you'll get links plus a transcript for every new episode emailed directly to 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